First-quarter U.S. growth may be deceiving

Economy probably grew 3%-plus but pace unlikely to be maintained

The U.S. may have grown in the first three months of 2013 as the fastest rate in more than a year, the government is expected to report Friday, but it always pay to be skeptical. The initial look at gross domestic product often paints an exaggerated portrait of the economy and the devil is in the details.

The first of three government releases on first-quarter growth will be released Friday at 8:30 a.m. Eastern by the Commerce Department. Economists polled by MarketWatch predict annualized growth of 3.2%, up from just 0.4% in the final three months of 2012. The data is seasonally adjusted.

If the economy grew as fast as analysts predict, it would mark the most rapid expansion since the end of 2011 when GDP tallied a 4.1% expansion. Yet much of the seeming strength in early 2013 could simply reflect a snapback in Pentagon-related spending and the level of inventories.

Both of those categories were unusually weak in the fourth quarter and continued large gains should not be expected. Partly as a result, GDP is forecast to slow to less than 2% in the current second quarter.

— Jeffry Bartash

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National defense

Spending on military wares — jets, tanks, ships and ammo — has been very choppy over the past few quarters. That’s contributed to sharp swings in quarterly U.S. growth rates.

The government probably boosted defense outlays in the first quarter after military spending in the fourth quarter fell by the biggest amount in decades. The plunge in defense spending in the final three months of 2012 contributed to a 7.0% drop in total government purchases.

In the first quarter, economists look for combined state, local and federal spending to be flat to slightly lower. In other words, government won’t help or hurt the headline GDP number very much.

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Taking stock

Private-sector companies overstocked their warehouse shelves in the 2012 third quarter and then drew down inventories in the fourth quarter. The reversal helped trigger the steep slippage in GDP from 3.1% to 0.4%.

The same pattern might be about to repeat itself, though not quite as starkly. Companies restocked in the first quarter at a faster rate, but will probably slow down production in the second quarter. So once again an inventory buildup will add, then detract, significantly from U.S. growth.

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Consumer goods

The recent gyrations in defense outlays and inventories tend to obscure the steady nature of consumer spending, by far the biggest source of U.S. economic growth. Consumer spending has averaged 2.2% in the past 12 quarters, a number consistent with a modestly growing economy.

Economists predict consumer spending jumped by almost 3% in the first quarter, but that’s probably not sustainable. Higher taxes kicked in earlier in the year, wages are stagnant, the savings rate has fallen and the unemployment rate remains high. Until Americans acquire the means to spend more and maintain a healthy savings rate, the economy probably won’t extract itself from a slow-growth environment.

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Home front

The recovery in the real estate market has accelerated over the past year, and new investment in home construction has surged. That’s given the economy a pop and could continue to do so for months or years to come.

Economists expect spending on residential construction climbed by 15% in the first quarter, following increases of nearly 18% in the fourth quarter and 13.5% in the 2012 third quarter.

The housing market, however, is not as big as it once and its influence on the broader economy is smaller. The industry also has a long, long way to go to match the level of sales prior to the 2007-2009 recession.

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Computer age

Investment in business equipment and software plays an important role in whether the economy grows in the short term, but it has much bigger long-term implications. Such investment lays the seeds for future growth and improvements in productivity, the key to a higher standard of living.

Spending on equipment and software surprisingly fell in the 2012 third quarter for the first time since the recession, but investment bounced back in the final months of the year. Economists look for another increase in spending in the first quarter of 2013, perhaps in the 3% range.

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